||Ask Dr. Don
Stock stash loses cash
Dear Dr. Don,
I am losing money on my IRA because of the downward spiral in stock
prices. How can I move my money into a different IRA type or savings?
I just don't want to lose any more money. Is there any penalty in
changing, or will I have to pay taxes to change?
As long as you keep the money invested in an IRA, there aren't tax
consequences from changing how the account is invested. You can
move out of stock investments into bonds, money market investments
or even bank certificates of deposit without tax or penalty.
Before you consider changing firms, look into the
changes that may be possible within your existing account. Talk
to the account provider to find out what they offer besides stock
If you can't get comfortable with the choices offered
by your current account provider, then moving your IRA from one
account to another is a fairly straightforward process.
The most common mistake is to cash out the existing
account by accepting a check for the balance. When you do that the
balance will be subject to mandatory withholding of 20 percent.
Fully funding the new account then requires you to
come up with the amount of the withholding or else the withholding
is treated as a distribution subject to income taxes, plus a 10
percent tax penalty if it is an early distribution. You're also
under some time pressure. You only have 60 days to fund the new
account from the date the check is cut.
Instead of getting a check, you should do a direct
transfer into the new account. It's easiest to figure out where
you want to invest, and then have a representative of that firm
request a direct transfer from the account that you're closing into
your new IRA account.
The longer you have until retirement, the less sense
it makes to turn your back on stocks. Stock investors have had a
hard time of it over the past three years, and there is no guarantee
that things will get better anytime soon, but keeping some exposure
to stocks makes sense when you're investing for the long haul. The
three-year and five-year annualized returns on the S&P 500 Index
are negative, but the 10-year annualized return is still about 9
You could move to bond investments only to find out
that the Federal Reserve is at the end of an easing cycle and interest
rates are headed higher. Higher interest rates mean lower bond prices
and lower returns for bond funds. The bull market in bonds may be
nearing an end. You want to avoid buying high and selling low in
the bond market, just as you would in the stock market.
What's the answer? Diversify your investments between
stocks, bonds and cash. As you close in on retirement you should
reduce risk in your portfolio but still have a part of your investments
that offers you an opportunity for returns greater than the inflation
Treasury Inflation Indexed securities can be a good
choice in tax-advantaged retirement accounts as a conservative substitute
for stock investments because this investment is indexed to changes
in the inflation rate as measured by the Consumer Price Index.
Don't be afraid to hire a fee-based financial planner
to help you sort through where to invest. He can help you avoid
decisions made by looking backward and fighting the last war rather
than looking forward toward meeting your financial needs in retirement.
-- Posted: Oct. 24, 2002